Where does Standard & Poor's get off?

August 8, 2011 - Mike Maneval

Economist Robert Kuttner, writing for the American Prospect, is furious over the Standard & Poor's downgrading of U.S. credit-worthiness. After noting the evaluation was based in part on a $2 trillion error by the agency, Kuttner observes, "But that was petty cash compared to what credit-rating companies cost the world economy when they corruptly took money from issuers of subprime bonds to help them come up with a formula to justify a triple-A rating. The entire financial collapse is on the conscience of the credit-raters. If they had the most elementary competence, they would have known that a bond backed by junk had to be junk itself," leading Kuttner to ask, "So where do these guys get off downgrading the debt of the United States?"

Kuttner notes that the markets agree with him. And he's right: Interest rates on Treasury bonds dropped even as private-sector stocks tanked in value on Monday. As Robert Pollin, economics professor at the University of Massachusetts, correctly forecast for a reporter at The Nation, the downgrade did not have an impact on Treasury bonds but shook stocks up, because investors often “act on the basis of incomplete, or even inaccurate, information” and could “interpret the downgrade as evidence of a rising default risk.”

The Nation further chides Democrats who blame the Standard & Poor's decision on Republican policies for pretending the Standard & Poor's "plainly unsound" evaluation has merit at all, noting ratings agencies confer only four U.S. corporations with triple-A status, and the loss of triple-A status for Berkshire Hathaway and General Electric years ago had little, if any, consequence.

Pollin goes on to address Standard & Poor's failures in the subprime market - the ones Kuttner also blasts - suggesting the downgrade has more to do with rehabilitating the agency's image after bipartisan hearings identified credit ratings agencies as a "key cause" of the 2008 financial meltdown.